ERP January 1951 Erp

To the Congress of the United States:We face enormously greater economic problems, as I transmit this fifth

annual Economic Report, than at any time since the end of World War II.Although our economic strength is now greater than ever before, very largenew burdens of long duration are now being imposed upon it.

The United States is pledged and determined, along with other freepeoples, to check aggression and to advance freedom. Arrayed against thefree world are large and menacing forces. The great manpower underthe control of Soviet communism is,being driven with fanatic zeal to buildup military and industrial strength. We invite disaster if we underestimatethe forces working against us.

The economic strength of the free peoples of the world is, however,superior to that of their enemies. If the free nations mobilize and directtheir strength properly, they can support whatever military effort may benecessary to avert a general war or to win such a war if it comes. Theresources are on our side. The only question is whether they will be usedwith speed and determination. The answer will depend upon unity ofpurpose and of action—unity among the free nations, unity here in theUnited States.

Unity is imperative on the economic front. On this front, under theAmerican system, everybody is involved—every businessman, worker andfarmer; every banker and scientist and housewife; every man and woman.We can win our way through to ultimate triumph if we all pull together.Decisive action, essential to our safety, should not be halted by controversynow.

It is in this spirit that I transmit this Economic Report to the Congress.

The Nature of the TaskWe must understand the nature of our defense effort here at home. Our

job has three parts.In the first place, we must achieve a large and very rapid increase in

our armed strength, while helping to strengthen our allies. This means moretrained men in uniform, and more planes, tanks, ships, and other militarysupplies. Second, we must achieve, as rapidly as possible, an expansion ofour capacity for producing military supplies. Thus must be substantiallygreater than would be required to achieve our present targets for armedstrength; it must be large enough to enable us to swing rapidly into full-scalewar production if necessity should require. And third, we must maintain

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and expand our basic economic strength—important both to military pro-duction and to our civilian economy—so that we can continue to growstronger rather than weaker if it should prove necessary to continue adefense effort of great size for a number of years.

The first part of this task—the primary military build-up—imposes themajor immediate burden on the economy.

For the fiscal years 1951 and 1952 combined, new obligational authorityenacted or anticipated for our primary national security programs—for ourmilitary forces, for economic and military aid to other free nations, foratomic energy and stockpiling, and for related purposes—will probablytotal more than 140 billion dollars. Actual expenditures on these programsin the fiscal year 1950, the last full year before the Korean outbreak, totaledabout 18 billion dollars. At the present time, they are running at an annualrate of somewhat more than 20 billion dollars. By the end of this calendaryear, they should attain an annual rate between 45 and 55 billion dollars,or from 25 to 35 billion dollars above the present rate. The actions weare taking should enable us, within twelve months, to expand this rate ofexpenditure very rapidly if necessity should require.

Current expenditures for these purposes now represent about 7 percentof our total national output. By the end of this year, this proportion mayrise to as much as 18 percent. This compares with the roughly 45 percentof our total output that we were devoting to defense during the peak yearof World War II. While the present program is thus very substantiallyshort of the requirements imposed by full-scale war, it nonetheless requires amajor diversion of effort. Furthermore, there will be a much more severedrain on some particular supply lines. By the end of the year, our expand-ing defense programs, including stockpiling, may be absorbing up to a thirdor more of the total supply of some of our basic commodities, such ascopper, aluminum, and natural rubber. While direct defense require-ments for steel may not total more than 10 percent of total output, theneeded expansion of our essential industrial capacity will require a muchgreater diversion of steel from ordinary civilian uses.

In terms of manpower, our present defense targets will require an increaseof nearly one million men and women in the armed forces within a fewmonths, and probably not less than four million more in defense productionby the end of the year. This means that an additional 8 percent of ourlabor force, and possibly much more, will be required by direct defense needsby the end of the year.

These manpower needs will call both for increasing our labor force byreducing unemployment and drawing in women and older workers, and forlengthening hours of work in essential industries. These manpower re-quirements can be met. There will be manpower shortages, but they canbe solved.

The second part of the job is to build up our capacity for producing mili-tary supplies—our military production base. For example, our present


aircraft program calls for capacity to produce 50,000 planes a year. Ourpresent program for tanks calls for the capacity to produce 35,000 tanks ayear. We are not now placing orders for that many planes or tanks, but weare getting ready to produce them if we need them.

There are many cases where our immediate production needs will requirethe diversion of plants now devoted to civilian production,, but we cannotbe satisfied with this solution alone. We must increasingly create newcapacity to meet defense production targets. This will give us more eco-nomic strength, which means more power in reserve for any contingency.The job is made easier because we still have substantial reserve plant andequipment, as a result of the industrial reserve policy instituted at the closeof World War II. It is a great program, but we can meet it.

The third part of the job is to increase our basic industrial strength—tobuild up our facilities for the production of steel, aluminum, power, andother basic commodities and services. This ability should be brought toa level where it can carry the present defense burden without the necessityfor irksome controls extending over a long period. This will also increaseour ability to meet any requirements for a greater military effort.

In the case of steel, for example, we must raise the capacity of the in-dustry from its present level of about 103 million ingot tons a year by enoughto support our defense effort and to sustain our civilian economy. TheCouncil of Economic Advisers estimates that this will require an increasein capacity to about 120 million ingot tons in the next three or four years.This estimate is not necessarily final. But it suggests the kind of growthwe are working for in our economy in the years immediately ahead.

To increase our steel supply, we must also increase our supplies of ironore. Output of the high-grade Lake Superior ore fields can be maintainedat present levels for only a few years longer. Thereafter, we shall have torely more and more on lower-grade domestic ores and on imported sup-plies. Expansion of domestic plants for treating low-grade ores, and ofore production facilities in Labrador and Venezuela, together with relatedtransportation facilities, is essential.

Electric power is another field in which we must expand capacitypromptly. At the present time, electric power is in short supply in thePacific Northwest, in the Tennessee Valley area, and in some other regions.The supply is expected to become increasingly short throughout the country,as demands will increase faster than the expansion of capacity now planned.Reserves will fall more and more below safe and desirable margins. Al-ready the reserve margin has practically disappeared, in areas where thepower shortage is most acute. Yet, expansion of capacity now planned inatomic energy, chemicals, and aluminum and other metals related to thedefense effort, will impose an additional load of 4 to 4J/2 million kilowattson our power facilities.

In the face of this situation, we should plan to increase our generatingcapacity by well over 20 million kilowatts during the next three years. The


major share of this expansion must come from private utility enterprises.The large public hydroelectric projects take more time, but I am recom-mending the development of additional public power capacity in the PacificNorthwest, in the Tennessee Valley area, at Niagara Falls, along the St.Lawrence River as a part of the seaway and power project, and elsewhere,to contribute needed additions to the power supply as quickly as they canbe built.

These are but two examples of the need to build up our productive capac-ity. If we were now engaged in full-scale war, we could not afford to devotemanpower and materials to these longer-range programs. But to fail to doso under present circumstances would be short-sighted and potentially costly.Action now is essential, to make us stronger year by year in all of the com-ponents which enter into any military strength that we may need in future.

The Power of the American Economy ToPerform the Task

There is no question that our economy can sustain the great exertions out-lined above, and still remain strong and grow stronger. The past perform-ance and present condition of the American economy make this plain.

In the ten years since this Nation decided that fascist aggression had tobe stopped, the growth of our economic power has been prodigious. Com-paring 1950 with 1940, our total output, in actual units of goods andservices, is more than 50 percent higher. Farm production is up 25 per-cent. The total labor supply has increased by 9 million, and civilian em-ployment by 13 million. In addition, we have more and better tools andequipment. Steel capacity is up more than 20 percent; oil refining capacityup 40 percent; electric power capacity up 70 percent. On our farms, thereare two or three times as many tractors, trucks, and power-driven machines.Farm use of electric power has gone up three or four times.

It is sometimes thought that most of this economic growth occurredduring World War II. True, under the dire necessity of wartime, weexpanded with very great speed. But during the past five years, we haveadded greatly to the productive strength attained before V-J Day. Morethan 90 billion dollars (in 1950 prices) have been invested by privateenterprise in plant and equipment. Total manufacturing capacity hasincreased by between 25 and 30 percent. Steel capacity is 12 percenthigher; that of our chemical and machinery industries, 60 to 70 percenthigher. Civilian employment late in 1950 was 8 million above the peakyear of World War II, and output per man-hour for the economy as awhole has advanced by about 10 percent.

There has been very recent demonstration of our economic power, andof our capacity for further growth. In the first half of 1950, the upsurgeof business recovery from the mild recession of 1949 was swift and com-


prehensive. This demonstrated the soundness of our economic structure.In the second half of the year, the pace of economic expansion becamemore rapid. Every part of the economy responded to the challenge ofinternational developments. During these six months, private investmentin construction, equipment, and additions to inventory reached the recordannual rate of 53 billion dollars. Taking the year as a whole, industrialproduction was 14 percent higher than in 1949, and by June had exceededthe 1948 peak. The total output of goods and services during the year1950 was 7 percent higher, in real terms, than during the previous year. Itis now running at an annual rate more than 10 percent above the averagefor 1949. Civilian employment increased by about 1.3 million from 1949to 1950, and there were more people in civilian jobs at the peak of 1950employment than ever before.

Our economic history shows that we have risen to our greatest heights inthe face of our greatest dangers. From the beginning of World War IIto the time of our peak effort, we stepped up farm output by 20 percent, andindustrial production by nearly 90 percent. Our total national output roseby more than 60 percent. If it had been necessary, we could have donemuch more.

We may not be able to add to our production so rapidly in the yearsimmediately ahead. We had more unused resources of manpower, plant,and materials in 1940 than we have now. There are now some relativeshortages of raw materials. On the other hand, as long as we avert a totalwar, we can devote a larger part of our total resources to building up oureconomy than we did after Pearl Harbor.

The accompanying Annual Review by the Council of Economic Advisersestimates, after careful examination of our economic resources, that we canand should achieve an annual rate of total output more than 7 percent abovethe current level by the end of this year. The estimates made by theCouncil at the start of 1950, concerning how much the economy could growin real terms during the year, were realized. I believe that this progresswill continue. We must plan and work together, to increase the totalproductive strength of our economy by at least 25 percent within the nextfive years.

We have not reached, and cannot foresee reaching, any final ceiling onour productive power. Throughout the years we have grown, despite upsand downs, and we will continue to grow. We have a growing population.We have business initiative and daring. We have workers of great skilland energy. We have the ability to make practical use of new scientificdiscoveries and inventions. We have, despite some shortages, bountifulnatural resources. Above all, we have faith, justified by accomplishment,in our economic system.

This great vitality of our economy provides the answer to the questionof whether we can sustain the burden of our defense program. In relativeterms, this burden at present is much less than it was in World War II.


At the peak of World War II, we were devoting about 45 percent of ournational output to defense. By the end of this year, we will be devotingabout 18 percent to defense. During World War II, even when defenseproduction was at its highest, we maintained a strong economy. Civiliansmade sacrifices, but they did not suffer.

Our total output today has reached approximately the 1944 peak. Moreimportant, we are now maintaining this rate of production with muchshorter hours and less strain upon facilities. Our productive potential isnot as fully mobilized as at the height of World War II. If we approachedthe same degree of economic mobilization, our total output would be verymuch greater, and so would our output of defense items. Our contem-plated defense program, even if it were doubled, would still be clearly withinour capabilities.

The Inflationary DangerWhile it is clear that we have the productive ability to meet even far

greater defense demands on our economy, we must not be misled into think-ing that we can make the change to a defense economy easily. It willrequire effort, restraint, and sacrifice by all of us.

The character of our economy must now be changed rapidly to meet thenew challenge. Those types of production which support the expandingdefense effort must be greatly enlarged. The part of our total nationaloutput going into defense should rise from 7 percent to nearly 18 percent,during the year 1951. By the end of the year, the expanding defenseprogram may be absorbing one-third or more of some basic materials.

In some respects, it will be harder to convert to defense production thanit was in 1940., Then, there were idle plants and men and materials whichcould be channeled into the defense effort. Since our economy has recentlybeen running full blast, the defense program will have to pull men andmaterials, as well as plants, away from existing peacetime uses. This willpull millions of people away from normal peacetime production.

Although we can increase production, we cannot do it quickly enough toexpand the defense program, and at the same time still have as much leftover for other purposes. We must put heavy restraints upon nonessentialbusiness activity. During the past few years, nearly 70 percent of ourgrowing national output has gone into consumption. This has led tohigher standards of living, which is the ultimate purpose of a peacetimeeconomy. But the total supply of consumer goods cannot be increasedthis year, and many types of goods must be sharply curtailed. Yet thepopulation will continue to grow; new families will continue to be formed;and more incomes for practically all groups will be generated by more pro-duction, more employment, and longer hours. The excess of consumerdemand over available goods will rise by many billions of dollars.

This will cause intense and mounting inflationary pressures, which mustbe counteracted.

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During 1950, even before the defense expansion gathered speed, inflationstarted to march. Wholesale prices rose almost 15/2 percent, and passedthe previous all-time peak in the second half of the year. Particular priceincreases were even more spectacular, with chemicals rising by 211/2 percent,and textiles by 24 percent. The average price of goods to consumers roseover 6 percent; and there was over a 4l/z percent rise to a new all-time peakin the six months from June to December.

Incomes also started to rise sharply. During the year, real weekly earningsin manufacturing, after adjusting for changes in prices, rose by 10 percent.Corporate profits before taxes rose by about 6 billion dollars above theprevious record year. Most types of income, particularly in the second halfof the year, rose faster than production.

If inflation continues to gain cumulative force, it will multiply the cost ofthe defense program. It will undermine production, destroy confidence,generate friction and economic strife, impair the value of the dollar, dissipatethe value of savings, and impose an intolerable burden upon fixed incomegroups. This must not happen.

To fight inflation, demand must be held down until supplies can catch up.This is why we must have a stringent stabilization program. It will meansacrifices by everybody. But under the conditions now facing us, restraintswill serve the interest of all.

Principles for ActionAs we prepare ourselves for the stern task which confronts us, we must keep

in mind five basic principles. These are: (1) all of us must plan; (2) all ofus must serve; (3) sacrifices must be shared fairly; (4) we must develop allour resources wisely; (5) we must work with our allies in the common cause.

All of us must plan

A defense emergency requires far more planning than is customary ordesirable in normal peacetime. The military build-up is a planned effort.The mobilization of industrial support for this military build-up is a plannedeffort. The industrial cutbacks and civilian restraints, necessary to achievemilitary and economic mobilization, are planned efforts. The major deci-sions as to how much goods and services must be left over for consumers, tomaintain a strong base for the whole undertaking, also require planning.In a defense emergency, all of these problems are interrelated.

In these critical times, it is recognized that Government must assumeleadership in this planning. It has the prime responsibility for nationalsecurity. It has access to the basic information. The most important op-eration toward this end is the broad programming of various majorrequirements; the balancing of these requirements against supply; and thedevelopment of policies to satisfy needs according to priority of purpose.


But the Government cannot develop these basic plans alone. The neces-sary experience and know-how are to be found throughout our wholeeconomic system. Through constant consultation, these talents should bedrawn into the whole planning effort. After the basic economic plans areoutlined, most of them will have to be carried out by businessmen, workers,and farmers. They will be able to carry out these plans better, if they havehad a chance to participate in creating them from the start.

These basic economic plans set general targets or goals. The detailsmust be filled in by people all over the country. It may become necessaryfor the Government to indicate that longer hours of work are desirable.But working arrangements are made between employers and employees.The Government may indicate that more steel is needed. But steel produc-tion is in private hands. The Government may indicate that more cottonwill be needed. But cotton is grown by farmers.

Businessmen always plan; and now they must plan how they can besthelp to make their country stronger. Labor organizations always plan;and now they must plan their contribution to the defense effort. Farmersalso plan; and they, too, must now plan to play their full role in the nationalsecurity effort. Government plans can aid, but cannot substitute for, thisindividual and group planning. To neglect this, would be to undermineone of the greatest sources of our economic strength.

All of us must serve

In a defense emergency, all those on the home front should serve, to thelimit of their ability, in the kind of work for which they are best fitted.

Businessmen should serve, by employing their financial resources andmanagerial skills to produce the greatest possible amount of the goods whichthe Nation needs. In the period ahead, businessmen will have responsi-bility for a much larger part of the investment program than during WorldWar II, when a very high percentage of investment in new capacity wasmade by the Government. Our ability to reach production goals willdepend in large measure upon how effectively businessmen do their job.

Farmers should serve, by increasing their output. They have less man-power than before World War II, but far more machinery and fertilizer, andfar better scientific methods. They can also serve, by making shifts in out-put which are responsive to the needs of the defense economy.

Workers should serve, by helping to improve productivity. They shouldseek out jobs which are essential to the defense effort. They should co-operate by working longer hours wherever it will help the defense effort.More people should seek work than in normal times.

Millions of others, in addition to businessmen, industrial workers, andfarmers, are now called upon to do their jobs more efficiently, and toreadjust their efforts to the needs of national defense.

For all to serve in full measure, it must be in a common cause and notprimarily for personal gain. This does not mean that we should undermine

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the incentives which lead to more production. But the rewards for in-creased production cannot be as great under a defense program as they arein normal peacetime. This is because most of the increased productionmust go into national defense, and consequently cannot be used to im-prove incomes or lift standards of living.

Each group and individual will be more willing to put forth greatereffort, if it appears clearly that everybody is doing the same. Businessmen,workers, and farmers will be willing to work harder, to the extent that theyfeel that they are working harder to serve their country, and not just tobenefit somebody else. There should be a sense of equality of service inthe defense program. Public policies must help to assure this.

Service by all is even more important than sacrifice, because it is work,and more work, that increases production.

Sacrifices must be shared fairly

No matter how efficiently we do our jobs, all of us must make sacrifices.Businessmen must make sacrifices. They must pay much higher taxes.

While profits should not be taxed to the extent which would jeopardizeproduction or destroy incentives, businessmen cannot expect to retain profitson the scale which would be expected during normal peacetime prosperity.They must also accept restraints and controls upon many of their businesspractices—including price policy and the use of materials and manpower—which are not customary in peacetime. They must be willing to withdrawfrom enterprises which are nonessential and wasteful during a nationalemergency.

Workers must make sacrifices. They must seek the jobs which needdoing, in the locations where these jobs must be done, instead of the jobswhich may be most pleasant in the locations which are most convenient.They must accept restraints and controls upon wages, designed to preventthe wage increases which would be attainable if more goods were beingproduced for wage earners to buy. While the right to bargain collectivelywill be preserved, workers—along with management—must find ways tosettle disputes without stopping essential production.

Farmers must make sacrifices. They should receive their fair share ofavailable national income. But they cannot expect to avoid their fair shareof the cost of national defense. Over the past two decades, farm standardsof living have risen substantially, and they needed to rise, because farmershad lagged far behind others in sharing the national income. But thatrate of progress cannot be continued in these perilous times.

All economic groups must pay much higher taxes.American families must make sacrifices. They can expect very sharp cur-

tailments in the supply of durable equipment which brings convenience andentertainment to the home. They will have to make their household goodslast longer, their automobiles and appliances3 their linen and clothes. Theymust save a larger portion of their incomes. Many of them must post-pone buying a new house.


These sacrifices will not prevent us from maintaining a strong and grow-ing economy, capable of supporting the current defense program or anygreater program that we may need to undertake. On the contrary, thesesacrifices will make for a stronger nation by curbing inflation. They willmake us stronger, not only by augmenting our military strength, but also byenabling us to increase the productive facilities which can lighten theeconomic burden in the long run.

It is essential that the sacrifices which are necessary in these critical timesbe shared fairly by all groups. Businessmen will be more cooperative insacrificing peacetime profit objectives and paying more taxes, if it is clearthat this is not being done just so farmers and workers can have moreincome. Farmers will be more cooperative in sacrificing peacetime farmincome objectives, if it is clear that this is not being done just so workerscan get more wages and businessmen can get more profits. Workers will bemore cooperative in sacrificing peacetime wage objectives, if it is clearthat this is not being done just to provide more profits for business or morefarm income. Professional people, civil servants, office workers, and thoseliving on fixed incomes^ will be willing to accept their share of necessarysacrifices, to the extent that it is clear that this is not being done just toprovide for other people more profits or wages or farm income. All willbe willing to make far more sacrifices for national defense and to keep oureconomy strong, if the burden is shared on a fair and equitable basis.

We must develop all our resources wisely

The rapid expansion of the defense program must be the first objective inall that we do. But military strength does not depend upon guns and armedforces alone. These forces must be equipped by our industry, fed by ourfarms, and supported by all the people. There must be a continuing balancebetween the build-up of military strength and the build-up of economicstrength.

In a total war, this balance would be very different from what it shouldbe now. In a total war, we would have total military mobilization, accom-plished by considerable depletion of other kinds of strength. In the currentsituation, we must place considerable stress upon economic strength, or runthe danger of being weak at some future time if total military strength shouldthen be required.

With these purposes in mind, we must apportion materials and manpowercarefully among military needs, stockpiling, and industrial needs. We mustdivide industrial supply carefully, so as to expand in some areas while con-tracting in others. We must divide total civilian supply carefully betweenindustry and consumers, so that we do not weaken manpower while im-proving tools.

The handling of our natural resources is a vital aspect of this problem.Many projects must be cancelled or deferred, but those necessary for defenseand essential civilian needs must go forward. If we allow our agricultural

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and range lands and our forests to deteriorate, and if we misuse criticallyneeded minerals and supplies of water, we shall become weaker each yearinstead of stronger. If we do not expand the use of some of these re-sources—as, for example, through carefully selected power developments—we cannot expect to reach the full potential of our industrial strength. Wecan cut down enough on the private and public use of materials and man-power for nonessentials to accomplish these essential projects.

Our human resources are our main economic strength. When we finallywin in the contest between freedom and slavery, it will not be primarilybecause of our superior technology. It will be primarily because we valuehuman beings, and because the free man can outproduce the oppressed man.

No danger could be greater than to concentrate so blindly upon buildingup our military strength that we neglected and impoverished the ultimatesources of that strength. Three examples will illustrate this principle.

First, we cannot afford in the immediate future to devote as large a partof our resources to the improvement of health services and facilities as wehad planned to do in normal peacetime. But we cannot maintain a soundbase for whatever military mobilization may be needed in the months oryears ahead, if we let sickness and inadequate health standards continue totake their heavy toll. We must devote somewhat more of our resourcestoward improving the health of the general public. Whether the childrenof today will be the soldiers or civilians of tomorrow, they must grow to astrong and healthy maturity.

Second, we cannot in the immediate future find the materials and man-power to build as many new schools and provide as many new teachersas we had planned to do in prosperous peacetime. But whether the youthof today is to become a soldier or a civilian citizen tomorrow, he must re-ceive the general education for citizenship and the technical training whicha modern army, a modern factory, and a modern farm all require.

Third, we cannot expect in the immediate future to achieve all of theexpansion of social security which we had planned for in prosperous peace-time. But some of the hazards which social security is designed to guardagainst are increased by the mobilization effort. Increased protectionagainst these hazards will make the mobilization effort more effective. Inaddition, the expansion of some contributory social security programs canbe an important factor in meeting the stabilization problems we will faceduring this period, because their immediate effect would be anti-inflationary.

In these three matters, we should give vigorous attention to meetinghuman needs in such a way as to increase our economic and militarystrength.

A strong America must be strong throughout.

We must work with our allies in the common cause

To meet the present danger, we must help to strengthen our allies,and they must help to strengthen us.

922781—51 2 II


The effort must be made by the community of free nations, workingtogether, and contributing their common strength in accordance with theirability to do so. As the single most powerful member of the communityof free nations, our country has the special responsibility of leadership.We must help other free nations to do their share effectively.

In two world wars, this country has been spared the ravages of war on itsown soil. Partly as a consequence, the United States has grown stronger,while some of the other free nations have become relatively weaker. Underthese circumstances, it would be wrong for us to shrink from bearing a largerpart of the burden now. We are able to bear it. We must bear it.

Since the Korean outbreak we have sharply shifted the emphasis in oureconomic assistance programs toward supporting the defense programs ofthe free countries associated with us, and we have greatly enlarged ourmilitary assistance program.

There is no water-tight distinction between military assistance and eco-nomic assistance. Our friends abroad need both. For their military ef-forts to be strong, their economies must be strong. When we contribute totheir military strength, we leave more of their own resources free toimprove their economic strength. When we contribute to their economicstrength, we leave more of their own resources free to build up theirmilitary strength. The relationship between the two types of assistanceshould be determined realistically on grounds of efficiency, and not byarbitrary labels.

The programs of economic assistance thus far undertaken have acWedgreatly to the strength of other nations friendly to us—nations believingin freedom and justice. This gain could be dissipated, if the militarybuild-up which they must now undertake should weaken their economies.

The close connection between a nation's economy and its military effortsmakes it impossible for peoples to be allies on one front and strangers onother fronts. When we join together for military purposes, we must alsocooperate for economic purposes. When we consider jointly the distributionof armed forces, we must consider cooperatively the use of strategic economicassets.

In this whole process of cooperation, the strongest must do the most, butall must do their part. While our resources are great, they are not unlimited.As we make a portion of our resources available for use by others, we expectthem to use this aid well and efficiently in the common purpose. In addi-tion, our aid will enable them in many cases to increase their production, fortheir use and ours, of materials which we do not have, or do not have in suf-ficient quantity.

Government Economic PoliciesThe actions of the Government are being redirected to meet the over-

riding demands of national security. The Budget I shall transmit next week

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provides only for urgent needs for Government activities and services in thisdefense period. Many Government programs are being sharply curtailed.The departments and agencies of Government are moving rapidly aheadwith their part in the defense effort, and deferring wherever possible anywork which is not immediately necessary.

The same principle should guide the Congress in enacting legislation atthis time. We must all put first things first.

Certain immediate tasks will confront the Congress at this session, as itenacts the legislation necessary to carry us forward. I mentioned thesebriefly in my Message on the State of the Union earlier this week. Some ofthem are discussed more fully in this Economic Report, and in the BudgetMessage to follow. In a number of cases, however, details are still beingworked out, and I shall transmit recommendations in later special messages.

The first priority, of course, attaches to the support of our own militaryservices and of our combined efforts, with other free countries, to build upthe strength of the free world. In both cases, we are concentrating on theurgent task of preparing stronger defenses against aggression. At the sametime, we are building a foundation for continuous growth in the ability offree men, in our country and elsewhere, to advance the cause of freedom.

Toward these ends, the economic policies of the Government should nowbe directed.

Expansion of production

Industrial production. Under the Defense Production Act, enacted lastSeptember, we have taken the first essential steps to give priority to defenserequirements out of current industrial production. In the field of prioritiesand allocations, where Government action has already been vigorous, stepshave already been taken (a) to insure that defense requirements for pro-duction materials and facilities are met on schedule; (b) to distribute theremaining available supply of critical materials and products equitablyamong other users after defense requirements have been satisfied; (c) toprovide materials for needed expansion of productive capacities; and (d) topromote conservation of scarce materials and the development of substi-tutes. The commodities affected have included aluminum, cobalt, cad-mium, copper, nickel, rubber, steel, tin, zinc, and other basic materials.Selective rather than general curtailment is now being put into effect, and acomprehensive materials control plan is being prepared for use when neces-sary. Priorities and allocations powers will have to be renewed by theCongress this year, if our production control program is to be continued.It is, of course, essential that this be done.

In placing orders, the Defense Department and the other agencies con-cerned are adjusting contracting and subcontracting policies to broadenthe supply base and to bring in more small producers. Procurement isbeing related more closely to geographic availability of manpower, mate-rials, and equipment resources. Procurement cost-price policies are being

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centered upon efficiency problems. Greater uniformity of standards isbeing developed for all procurement activities.

In planning and carrying out the military procurement program,, theDepartment of Defense is giving major emphasis to obtaining productivecapacity broad enough to support a much larger military procurement pro-gram than the one now under way. Thus, the Department is spreadingorders among as many contractors as practicable, and tooling-up plants withreserve capacity, so that military procurement can be further enlarged onshort notice if necessary.

In addition, we have begun the work of obtaining increased plant ca-pacity in key industries, among them steel and aluminum. Two maintypes of assistance are now being furnished by the Government to helpprivate industry expand: accelerated amortization under the new tax laws,and long-term Government loans under the Defense Production Act. Theseaids will help to secure much of the needed expansion.

Under the authorization of the Defense Production Act, Governmentagencies have received requests for direct loans totaling more than 830 mil-lion dollars, and are processing requests for accelerated amortization involv-ing outlays for plant expansions totaling nearly 4 billion dollars. Of thoseon which approval has already been recommended, 66 from the steel indus-try alone represent capital outlays of more than 1 }4 billion dollars.

Our loan program for expansion of productive capacity and supplies willsoon require more funds than have so far been made available. The pro-gram will of course need to be continued in operation beyond June 30, 1951,the current expiration date. In addition, our present aid programs willneed to be backed up by legislative authority for direct government con-struction of industrial facilities, in those special cases where private enterprisecannot undertake the job even with the government assistance available.

These and other aspects of our economic mobilization laws are now underreview by the Director of Defense Mobilization. After he has completed hisinvestigations, detailed recommendations will be made to the Congress forappropriate revision of the Defense Production Act and other relatedstatutes.

In addition to our efforts to expand industrial capacity, steps are beingtaken to increase production of essential raw materials, both here andabroad. Through financial aids for exploration and development andlong-term expansion loans, authorized under the Defense Production Act,and through our stockpiling and foreign economic aid programs, we arestepping up the production and procurement of critical materials, both athome and abroad.

Iron ore constitutes one of our most serious potential shortages. As theAnnual Economic Review points out, we should be receiving large ship-ments from the new Venezuela and Labrador developments by 1954 or1955. This is urgently needed to meet the expected decline in ore produc-tion from the Lake Superior region. But to avoid extremely high-cost


transportation, and hence high-cost steel operations, we should start at onceon the St. Lawrence Seaway and Power Project, so that imported iron orecan be shipped efficiently by water to the great steel producing centers ofthe Middle West,

The St. Lawrence project is vital also to bring in a new source of powerfor industry in the Northeast. We must have more power, in this andother areas, if we are not to place sharp limits on our industrial capacity.

Agricultural production. Our farms are no less involved in the produc-tion effort than our factories and mines. The demand for farm productshas increased greatly since the Korean outbreak. Military needs for cottonand wool have risen sharply. Military food requirements are also rising, asmore men come into military service. There has been an exceptionally highcivilian demand for meats and many other foods, and this is expected tocontinue.

In the face of these rising demands, we now have low supplies of cottonand wool. Our food supplies, while entirely adequate for the time being,will clearly have to be increased. The Government is moving now to helpmeet the need for increased production, especially of cotton, corn, wheat,wool, and livestock. Acreage allotments and marketing quotas have beenset aside. Price supports at 90 per cent of parity have been announced forcotton and wheat for the 1951 crop year. Every effort is being made tobring the new cotton crop to a level 60 per cent above that of last year.

Our farms are now more mechanized than ever before. To get out theincreased crops, they will need a steady supply of farm machinery and spareparts. Fertilizers will be equally necessary to meet expanding productiongoals. Our farmers are using much more fertilizer than before the war,and will need still more to get the yields that we are after. Many of thethings the farmers need will be in short supply. Farm and industry require-ments will have to be balanced very carefully. But we will do our best tosee to it that the essential farm needs are met.

Manpower. We cannot produce in industry or agriculture without thetrained workers to do the job. As the defense production job speeds up, wewill have to be increasingly careful about the distribution and use of theskilled labor we have available. We will have to train more and more newworkers who are not now in the labor force. Major emphasis should beupon training and recruitment of unmarried women and married womenwithout young children. Support should be extended to nursery schools asan aid to mothers who want jobs.

Additional shifts and longer hours in some defense industries are beingencouraged. Industry hiring standards are being reviewed, to providesuitable jobs for more workers. Arrangements are under study to protectthe pension and seniority rights of workers who shift to defense jobs.Health, education, rehabilitation, and training programs are being reshapedto concentrate upon problems of defense workers. Existing housing, com-


munity facilities, and service programs are being modified, and constructionis being shifted to defense areas.

We are already setting up voluntary labor-management committees towork with the United States Employment Service in the principal defenseareas. These committees will help to shift workers into essential industries,and will gain cooperation in installing the most efficient hiring practices andpromoting the best use of skilled workers on the job. To provide better pro-tection of workers who leave their communities to take defense jobs in otherStates, the unemployment insurance system should be improved.

It is now quite clear that, just as in World War II, we will need speciallegislation to provide housing and community facilities and services fordefense workers in areas where adequate quarters are not now available.

We will need to encourage private construction of rental housing in theseareas. We will need publicly financed construction of housing and relatedfacilities where private enterprise is unable to handle the job. We willneed additional aid to community facilities and services in defense produc-tion centers. The Housing and Home Finance Administrator has submittedrecommendations for legislation to accomplish these purposes. I hope thatprompt action will be taken by the Congress.

Health services and education

It is clear that we cannot neglect the education and health of our people,without the most serious results for a long-run defense effort. Obviously,we will not now have available the resources to build or staff as manyschools and clinics and hospitals in as many places as we hoped to do innormal times. But the quality of essential services must be maintained andimproved, as fast as can be managed. This is imperative for the success ofthe defense job.

It is not enough to train people as workers—or as soldiers. They haveto be healthy enough to get a job and do it effectively. Right now, sick-ness is keeping about a million workers off the job every day. Right now,failure to meet health standards is making about a quarter of our youngmen unavailable for military service. During World War II, about sixmillion men were rejected by the armed services for physical or mentaldisabilities.

We cannot afford this waste of manpower, our most vital resource. Asa first step,, we must obtain more doctors, more dentists, and more nurses.The growing needs of the armed forces, piled on top of civilian needs,threaten the most dangerous shortages unless prompt action is taken by theCongress.

At the same time, we must expand our local public health services. Theyare essential to our civil defenses, and to the maintenance of safe healthstandards in our growing production centers.

As we move into a period when we will have an urgent need for allour trained men and women, we must face the fact that nothing can make

16


up for faulty basic education in our primary and secondary schools. Thisis as true for the men in military service, as for the factory worker or thefarm hand.

Our public school system faces the greatest crisis in its history. Morethan ever before, we need positive action by the Federal Government tohelp the States meet their educational tasks. We simply cannot afford tolet overcrowding, or lack of equipment or staff impair the basic educationof our young people.

Under legislation passed last year, the Federal Government is stepping upits aid to school districts overburdened as a result of Federal activities. Butspecial aid of this type to particular school districts will not come anywherenear meeting the general crisis which exists. Therefore, it is vital thatthe Congress act now to give the States general aid for school maintenanceand operation.

Economic stabilization

The Government has been moving ahead in several ways to stabilize thecost of living and hold down inflation.

Taxation. We should make it the first principle of economic and fiscalpolicy in these times to maintain a balanced budget, and to finance the costof national defense on a "pay-as-we-go" basis.

The Congress is to be commended upon the successful completion of twovitally important pieces of tax legislation since the middle of the calendaryear 1950. But it was commonly acknowledged that these were only thefirst steps. We must now, as rapidly as possible, take the next step, and itmust be a very big step, in view of the size of the new defense funds whichhave necessarily been appropriated and the required additions to thesefunds which will be set forth more fully in the Budget Message. Legislationshould be enacted, at this session of the Congress, to increase taxes by verymuch more than they were increased by the last two major tax bills whichthe Congress enacted.

These new taxes are required to finance the defense effort; and to helpkeep total spending within the capacity of current production, so that infla-tion does not reduce the purchasing power of the defense budget, reduce thereal value of people's savings, generate speculative buying and hoarding,and impede essential production. The real economic cost of this defenseeffort is that we must work harder, reduce consumption, and forego improve-ments in farm, business, and household equipment. This cost cannot be putoff into the future. It must be paid by the people now, one way or another,and it should be paid through taxation, in the manner consciously deter-mined by the Congress and not by the uncontrolled and inequitable inci-dence of inflation.

The new tax increases, now required, must press harder upon everysource of available revenue. Corporations should pay much higher taxes.Individuals should pay much higher taxes. Excise taxes should be higher

17


and more extensive. Many loopholes in the tax laws should be closed.In the near future, after further consultation with legislative leaders, newtax proposals will be transmitted to the Congress.

Taxation must be supplemented by greatly increased saving. Everydollar saved means a dollar less of inflationary price pressure. The alterna-tive to saving is not buying more goods now, because more goods are notnow available. The saving will give a nest egg with which to buy thegoods at a later time when they again become plentiful. The alternativesto more saving are either more taxes or inflation.

Savings help most in the defense effort, and do the most to hold downinflation, when they are invested in Government bonds. The Treasurywill continue its policy of reducing the amount of debt held by banks andplacing the maximum proportion of Government securities in the hands ofthe public, particularly individuals. The savings bond program supportsthis goal and encourages saving.

Credit controls. Controls over business and consumer credit also helphold down inflation.

Regulations W and X, issued by the Federal Reserve Board, have estab-lished higher down payments and shorter repayment periods for those whobuy durable goods and new one- and two-family houses on credit. Multi-family housing is now being brought under Regulation X. As the detailedrequirements for the defense program and other vital purposes becomeclearer, it may be necessary to make further changes in these regulations.These regulations are well suited to help deal with moderate reductions insupply. If circumstances force acute reductions, more direct measureswill be needed to assure equitable distribution. In the meantime, the au-thority to control housing credit through Regulation X should be enlargedby the Congress to include credit for the purchase of existing homes exemptunder the present law.

The Federal Reserve Board has also taken steps to restrain excessive banklending, by raising bank reserve requirements and allowing short-terminterest rates to rise.

Price and wage controls. We must use direct controls, as well as thesetax and credit measures, in order to deal with the problem of inflation.

In the case of prices and wages, considerable work has been done. Inaddition to the mandatory order affecting automobile prices, substantialprogress has already been made through negotiations towards securingeffective price stabilization in such basic materials as steel, copper, lead,zinc, and certain basic industrial chemicals. Negotiations to secure effectiveprice stabilization are under way with producers of other basic products. Anumber of regulations for mandatory action are in preparation.

We must achieve general stability as rapidly as possible, and hold it forthe duration of the present emergency. This will require the broad exten-

18


sion of price and wage controls to hold down the upward spiral. The staffsto apply broader controls are now being rapidly gathered.

In the case of prices,, the general policy must be to hold the price linewith utmost vigor, as the instances are rare indeed where further priceincreases are needed, either to stimulate production or to provide adequateprofit incentives. In these rare cases, some price adjustments subsequentto stabilization may become necessary to stimulate vital production.

It is my confident belief that price adjustments, after stabilization^ willnot be only in an upward direction. In many industrial lines, extensiveadditional production, made possible in many instances by military ordersadded to civilian orders, will result in lower costs, which can be passed onboth to civilian buyers and to the Defense Department.

To prevent excessive speculation in farm products, and wide fluctuationsin their prices, the Department of Agriculture should be granted authorityto control speculative trading and to strengthen its regulation of com-modity exchanges.

Price and wage stabilization must both be undertaken, because of theeconomic connection between prices and wages. It follows from this thatneither price action nor wage action can be decided upon in isolation. Thedecisions must be reconciled. They must be subject to central direction.But it does not follow that prices and wages are precisely similar, or can betreated identically. Prices are only one factor in the incomes of business,which may rise or fall independently of prices. But wages are the verylivelihood of millions of families. This makes wage stabilization the moredifficult part of the task. But it must be undertaken if prices are to bestabilized.

A more rapid rise of total wages available for spending than of the produc-tion of goods which workers can buy will not make more goods available, butrather will add to inflationary pressures. Since the amount of goods avail-able for consumers cannot be increased in the near future, and many types ofgoods must be severely contracted, the objective should be to limit corre-spondingly total spending of wages. Strong tax and savings programs arerequired, but stabilization of wage rates is also necessary. This is particu-larly necessary because, even with no wage rate increases, there will be anexpanding volume of total wages. Hundreds of thousands, of new workerswill be employed, and hours of work will be longer. Moreover, there are afew kinds of situations where adjustments in wage rates will be necessary anddesirable. But this should be done only upon a clear showing of necessity inexceptional circumstances. The predominant general rule should be toachieve stable wage rates until the flow of consumer goods can be increased.

It would be impossible to achieve lasting wage stabilization withoutholding the line on the cost of living. This makes it all the more importantto stabilize the price level. Unless this line is held, it will not be practicalto avoid some "cost of living adjustments" in wages in some cases. How-ever, there are many groups which could not be protected in this way. And

19


to extend such adjustments without limitation, even in all those cases whereit could be done, would add to the process of wages chasing prices and priceschasing wages. The only way out of this dilemma is to stabilize the cost ofliving, and to do it quickly.

Wage stabilization also involves the problem of incentives. Withoutincentives, it would be harder to sustain longer hours of work in defenseindustries, and to spur on workers toward their participation in efforts toimprove productivity. As we look forward to years of constantly increasingeffort to strengthen our economy, this problem of incentives cannot be over-looked. Yet the peacetime increases in wages, which normally provideincentives, would under current conditions add to inflationary forces. Con-sideration should be given to the suggestion that, where some wage adjust-ments become necessary over the long pull to provide incentives^ theincreased potential spending power should be diverted from the actualspending stream until inflationary pressures become less serious. Variousconstructive proposals may be developed to obtain this deferred effect.Wage adjustments related to increased social security contributions wouldbe one method. Other effective savings programs should also be considered.

I firmly believe that effective wage stabilization must draw heavily uponthe experience and viewpoint of workers and employers with practical ex-perience. That is the principle underlying the Wage Stabilization Board.The Board is to be commended for its policy of consultation with representa-tives of labor, management, and the public. I earnestly trust that a soundand fair wage stabilization policy will quickly result. Such a policy willprovide the best foundation for effective wage stabilization in detail. Theprinciples which I have outlined can be the starting point for a wage stabiliza-tion policy which will receive the cooperation of those who would be affectedand which will serve the best interests of the Nation in this emergency.

In the interest of economic stabilization all groups should consider whatthey receive before taxation. Of course, heavier taxes will make it harderfor everybody. But for any group to seek to adjust its income upward, tocounteract the higher taxes which the defense program is making necessary,would tend to relieve that group from its share in the cost of achievingnational security.

I am sure that every group will be willing to accept the necessary sacri-fices in this emergency, if the whole stabilization program is fair andequitable. Effective price and wage controls, much higher taxes on busi-ness profits, along with many other restrictions which will affect the wholepopulation, are all aspects of a comprehensive stabilization program inwhich everyone will do his part.

It is already plain that the present rent control law has been madeobsolete, in the light of the necessary curtailment in the rate of housingconstruction and the current inflationary pressures. Since rents are sucha key element in the cost of living, I recommend that the Congress extendand strengthen the rent control law.

20


International economic programs

Our program of military and economic aid for the strengthening of thecommunity of free nations, including our programs for underdevelopedareas, are of vital importance. They are closely related to other aspectsof our foreign economic policy. The defense program increases the im-portance of strategic raw materials, and we are already working with otherfree nations to increase the supply of these materials, and to distribute themfairly. We should take cooperative action with the free nations, to makesure that critical materials are used to strengthen the common defense offreedom, and are not diverted to other purposes. In a short time, I shallsend to the Congress detailed recommendations on our international eco-nomic programs.

Use of export controls and allocations will enable the United States tocarry out more effectively its part of international allocations agreements,and to distribute more efficiently other commodities in short supply.

The power to control exports, now scheduled to expire June 30th, shouldbe extended.

International trade policies should be adjusted to joint requirements.While the defense effort will require a wide increase in trade controls, alarge part of the world's trade will continue to be conducted in normalchannels. The common defense objective can be furthered by the reduc-tion of tariffs, quotas, and other trade barriers. To this end, the TradeAgreements Act should be extended, our customs laws and proceduresshould be simplified, and the import tax on copper should again be waived.

Summary of Economic Developments in 1950By June 1950, the economy had almost fully recovered from the mild

recession of the previous year. Employment and production were high,and prices were rising. The anticipated expansion of our defense program,following the Korean outbreak, led to still further increases in employmentand production. It created strong inflationary pressures.

In this situation, many economic indicators reached record highs, andmost of them are still rising. Higher employment, longer hours of work, andovertime payments raised wages and salaries and swelled the already highdemand of consumers. On all fronts, strong demand raised prices, and insome shortage areas the price advance was rapid. Increased volume athigher prices boosted business profits. The obvious need for greater produc-tive capacity stimulated business investment. Rising living costs and highbusiness profits led to increasingly successful efforts to obtain wage increases.

The record levels of employment, production, and business investmenthave demonstrated the vigor of our economy. But the spiraling rise inprices, wages, and profits is a warning that inflation endangers our economicprospects and our defense efforts.

21


Civilian employment averaged almost 60.0 million persons in 1950, com-pared with 58.7 million in 1949. The gain in nonagricultural employmentwas about 1.8 million, but farm jobs declined by about 500 thousand.Employment increased steadily throughout the year, except for a smallseasonal drop in the fall months. At the end of the year, employment was atan all-time record for December.

Unemployment, after reaching a peak of 4.7 million persons in February,dropped markedly through most of the year. It reached a low of 1.9 mil-lion in October, and then rose slightly in the last two months of the year.At the end of 1950, only 3.6 percent of the labor force was unemployed.This is near a practical minimum for a peacetime economy, but is notirreducible under present conditions.

Production of goods and services as a whole in 1950 was 7 percent greaterthan in 1949. This was a record for any postwar year, and apparentlywas close to the record reached in World War II. In the fourth quarterof 1950, total production was 10 percent higher than for the year 1949.

The physical production of goods alone (not including services) was11 percent greater than in 1949, despite a 2 percent drop in agriculturaloutput. Industrial production increased 14 percent. Gains were espe-cially marked in the case of durable goods. More steel was produced in1950 than in any previous year. The automobile industry operated at arecord rate during most of the year. Electric power rose 13 percent over1949. Construction, measured in physical terms, reached an all-time high,and averaged 17 percent above 1949.

Prices moved upward throughout 1950, the pace of the advance increas-ing sharply after the Korean developments at midyear.

Wholesale prices in December were at an all-time high, 10.9 percentabove the June level and 15.4 percent above December 1949. The priceincreases were not limited to a few commodities, nor to a few groups. Fora few weeks after the Korean outbreak, farm and food prices rose sharply.The rise in industrial prices, while at first less spectacular, was steady andpersistent. At times, the violent gyrations in prices of imported raw ma-terials have been in the spotlight. But now the rise in wholesale prices hasbeen quite general, affecting all major categories of goods.

Consumers' prices rose over 6 percent during 1950, the major part of therise occurring in the latter half of the year. They ended the year at arecord level. Rising living costs absorbed a considerable part of the gainsin consumer incomes.

Wages and salaries and other labor income rose continuously in 1950,reflecting wage rate increases, longer hours of work, and increased employ-ment. By the fourth quarter, they had reached a record high of 155.9billion dollars, 16 percent above the level a year earlier. Weekly earningsin all manufacturing industries rose from $54.43 in November 1949 to $62.06in November 1950, a gain of 14 percent.

22


CHART I

PEFSEIPERC+ 10

0

-10

-20

-30

-40

+20

+ 10

0

-10

+ 30

+ 20

+ 10

0

-10

+ 10

0

-10J/ NO£/ 6R*/ ON£/ AL

SOUR

VENTAGE CHANGES INJECTED ECONOMIC INDICATORSENT PER

LABOR FORCED

mm^^^\ Wmf^ UNEMPLOYMENT

TOTAL CIVILIAN(INCLUDING EMPLOYMENT

ARMED FORCES)

1949 TO 1st TO 2ndI960 *N^ f HALF OF 1950

B • • • '

-

•'••••••••••: ~~

PRODUCTION

"Mfiffifflft.

\tmmmtffi •'••'•'•'•'•'•' "\ wxwwmfo % AftRIDILTURAL^

TOTAL GOODS 9 INDUSTRIALAND SERVICES-^

INCOME

•:

Hi

PERSONAL ^^^ CORPORATE PROFITSDISPOSABLE F.RM AFTER TAXES(AFTER TAXES, PROPRIETORS'

PRICES-*'

•r •• ! _jALL COMMODITIES INDUSTRIAL i ALL ITEMS i

PRonnrTc 4/\ ^ J

WHOLESALE C°NS

fJMERS*

r ADJUSTED FOR SEASONAL VARIATION.3SS NATIONAL PRODUCT IN 1950 PRICES.LY AVAILABLE ANNUALLY.L COMMODITIES OTHER THAN FARM PRODUCTS AND FOODS.

CE: APPENDIX TABLE A- 48.

CENT+ 10

0

-10

-20

-30

-40

+20

+ 10

0

-10

+ 30

+20

+ 10

0

-10

+ 10

0

-10

23


Wage increases were widespread and substantial in the second half ofthe year, being accelerated by a continued rise in the cost of living and byexpectations of wage and price controls.

Profits of American business, before taxes, exceeded all records in 1950,reaching 40.2 billion dollars, or 46 percent above the level of 1949. Theyattained a peak annual rate of 48.0 billion dollars in the fourth quarter.The previous peak rate was 35.3 billion in the third quarter of 1948. Thehigher profits reflected increased output, greater sales, and higher prices.

Corporate profits after taxes, and net incomes of unincorporated business,also made new records. The net income of farm proprietors rose in thelatter half of the year. By the fourth quarter, it was 9.4 percent above thefourth quarter of 1949, although 25 percent below the postwar peak in thesecond quarter of 1948.

Money and credit expanded with the growth of the Nation's output andthe rise in prices. Many components of business and consumer debtreached new highs.

The housing boom stepped up the growth in residential mortgage debt,from an 11 percent increase during 1949 to 17 percent during 1950. Con-sumer instalment credit increased 22 percent in the first nine months of 1950,compared to a rise of 15 percent in the same period of 1949. Governmentpolicies helped restrain the rate of consumer credit expansion during the lastquarter of the year.

Total privately-held bank deposits and currency increased by 6.4 billiondollars, reaching 176 billion by the end of the year.

Personal income, at an annual rate of 233 billion dollars in the final quarterof 1950, was 14 percent greater than a year earlier, and more than 8 percentabove the second quarter of 1950. Although the annual rate of personaltaxes increased by over 2 billion dollars from the first half to the second halfof the year, personal income after taxes rose by 11 billion. The rise in pricespartly offset this increase, but there was a gain of about 2 percent in con-sumer purchasing power.

Consumption expenditures in the second half of the year far surpassedthose of any previous period, nearing an annual rate of 200 billion dollars.The increase was especially marked in the purchase of durable goods. Asubstantial part of the increased consumer expenditures was a reflectionof higher prices.

Personal net saving dropped from a rate of 6.5 percent of disposableincome in the first half of the year to a rate of 3.1 percent in the thirdquarter, reflecting the first wave of post-Korean buying. Then it rose to6.4 percent in the final quarter.

Private domestic investment in construction, equipment, and additionsto inventory rose very sharply, increasing 19 percent from the first halfof 1950 to the second half, and increasing 67 percent from the second halfof 1949 to the second half of 1950. In the second half of 1950, this invest-ment reached an all-time record of 53 billion dollars at a seasonally adjusted

24


annual rate. The increase during 1950 was most marked in the case ofproducers' durable equipment.

The investment trend was already upward before the Korean attack ledto an expansion of the defense program, and to a rapid further rise in in-vestment. Private and Government surveys indicate that business plansto spend more for plant and equipment in 1951 than in 1950.

The resumption of inventory accumulation during the first half of 1950was a factor contributing to business recovery. Economic developmentsmade it difficult for business to build up inventories immediately after mid-year; the strong demand forced some reduction in the third quarter. Butin the fourth quarter, inventory accumulation was marked.

The use of capital funds by nonfinancial corporations was almost 24billion dollars above 1949. Three-fifths of these funds were obtainedinternally from retained earnings and depreciation allowances.

Construction put in place in 1950 was 23 percent higher than for theyear 1949, and greater than in any previous year. The sharpest increasewas in housing. A peak of 149,000 new dwelling units was started in May,and approximately that level was maintained through August. In thefourth quarter, starts fell sharply, partly as a result of credit restrictions.

International developments greatly stimulated domestic demand andproduction, but the pressure of foreign purchases lessened. Exports in 1950were nearly 1.9 billion dollars less than in 1949. The surplus of exports overimports fell from 6.2 billion dollars in 1949 to an annual rate of 3.0 billionin the first half of 1950. An increase in our imports, after we decided tospeed up the rebuilding of our defenses, brought this annual rate down tothe probably transitory level of 600 million in the second half.

Both the volume and prices of imports increased substantially. In1950 our export surplus was less than our foreign aid, but this aid declinedsubstantially from the 1949 level.

Government transactions showed a close balance between receipts andexpenditures for the year as a whole. Gash receipts increased while ex-penditures fell in the second half of 1950. After a cash deficit of 4.2billion dollars (annual rate) in the first half, there was a surplus of 2.9 billionin the second half. But the effect upon business operations of the antici-pated increase in the military program more than offset any counter-inflationary impact of the cash surplus.

An increase of 1.1 billion dollars in Federal cash receipts from calendaryear 1949 to calendar year 1950 was due to higher economic activity, toincreased employment tax rates, and to higher withholding tax rates onindividuals in the closing months of the year. Collections from corporateincome taxes will increase substantially this year, reflecting high profits in1950 and increased tax rates.

HARRY S. TRUMAN.JANUARY 12, 1951.


Documents

ERP January 1951 Erp